Bad news is good news as long as inflation remains high

  • The bad economic news is likely to be good news for the stock market as investors look for an end to 40-year highs in inflation, according to Fundstrat.
  • A recent spike in layoffs, combined with fewer job postings on, suggests wage inflation may be cooling.
  • If inflation cools, that would give the Federal Reserve some breathing space as it raises interest rates.

The stock market is set to view bad economic news as good news as investors look for an end to 40-year highs in inflation, according to a Monday note from Fundstrat’s Tom Lee.

The high inflation readings have forced the

Federal Reserve

to become aggressive in tightening financial conditions by raising interest rates and reducing its $9 trillion balance sheet. But much of the inflation in everything from oil to eggs is being driven by supply-side disruptions that aren’t influenced by Fed monetary actions.

If inflation starts to cool, it would give the Fed more breathing room in its current tightening cycle, which could lead to a sizeable rally in risky assets like stocks, according to Lee.

“Incoming data could show a weakening of the labor market… and therefore [the] the labor market could be cooling at a faster rate than tighter financial conditions imply,” he said.

A key driver of headline inflation is wage inflation, and a cooler labor market should help limit wage growth and thus other inflationary pressures. While JOLTS data shows that there are about 1.9 job openings for every unemployed American, that data is six weeks out of date.

The most up-to-date employment data readings show a significant cooling in new job postings on, combined with an increase in layoffs at startups over the past month. The continued decline in new job openings for the health care, retail and leisure sectors will likely feature in the next JOLTS data release, giving investors confidence that a weaker labor market will help limit inflation. wage.

The slowdown in job postings according to data comes as Google data shows travel searches have dropped sharply over the past month, according to the note. “It’s possible that this ‘revenge trip’ dynamic is facing tougher trade-offs. And this could reduce the need for hiring,” Lee explained.

Finally, layoffs have been rising to the highest level since May 2020 at startups as the cost of capital rises significantly, according to data from

“Layoffs are accelerating, hitting 7,700 so far in May…we expect this to turn parabolic soon, based on anecdotal feedback we’ve heard,” Lee said.

With updated alternative data showing a rapid slowdown in the labor market, that could help rein in wage inflation and lead to a general cooling off of the high-inflation readings investors have grown accustomed to in recent months. And that could spark a relief rally in stocks that have been hit by concerns about rising interest rates and high inflation.

Lee said he is leaning higher on stocks in the second half of 2022 after what has been a treacherous start to the year for investors.

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